If there's one upside to doing your taxes, it's the refund that you might get once you file.
True, it's actually your money that you're getting back. But it's still a cool feeling to get a check for a couple thousand in the mail from the government.
This year, 85% of Americans expect to get an average refund of $2,803. So what should you do with that mini-windfall? We got the lowdown from LearnVest Planning Services certified financial planner ™ Rachel Sanborn on how she advises her clients to use this little bonus from Uncle Sam.
1. Have Some Fun
First, take 10% of your refund and do something fun with it. Research shows that most people bump up their spending when they get a refund, even if they plan to save it all. So you might as well make it official and guilt-free. Go to dinner at an amazing restaurant, buy a fun new pair of sunglasses or spend a nice spring day at the amusement park. Really, whatever you want—just be sure to stick to the 10%. (After all, there is a right and a wrong way to splurge.)
2. Get Closer to Retirement
Now you've got 90% of your refund left. If you're not maxing out your retirement options, take some or all of your refund and put it toward that big life goal. It's almost always the best use of your dollars.
If you don't know yet in what order you should be contributing to your retirement accounts (or which accounts you should have), then click on the flow charts below, single or married depending on how you file your taxes.
Put your tax refund to the first account listed for you until you run out of refund, or you reach the maximum contribution on the account. (If a 401(k) is your first account, see below.) IRAs can take lump-sum contributions, so you can send a big check to your IRA, if that's your first account. Keep in mind that IRAs have an annual contribution limit of $5,500 per year (even if you have two types of IRAs, you can only contribute $5,500 between the two accounts).
If a 401(k) is your top account, you can't make a lump-sum contribution, so you'll just increase your 401(k) contributions temporarily (keeping in mind that annual 401(k) contributions are capped at $17,500), and then use the refund to make up for the difference in your paycheck. After you've used up the refund, be sure to lower your contributions again.
In either case, if you have money left over, you can put the money toward your second priority account, or move on to the next steps.
3. Get Ready for Emergencies
Are you already on track to retirement? Without your emergency fund stocked up, you could (or more accurately, will) face a situation that will force you to throw an expense on your credit card. So your savings account is your next step. Do you have at least six months of living expenses in a savings account just in case? If not, throw your refund in there to get closer to that goal.
4. Pay Off Credit Card Debt
By now, that refund is probably all accounted for. But if not (that's either impressive finances on your part or an impressive refund), here's your game plan: Tackle any balance you're carrying on your credit cards. Use what LearnVest calls the "Avalanche Method." Start with the card with the highest interest rate first, and then work your way down until all credit cards are paid off.
5. Pay Down Private Student Loans
If you're on track for retirement, have your emergency fund all set and have your credit card debt wrapped up, your next step is to bring down the balance on any private student loan debt you have. We've specifically called out private loan debt, because it often has a higher interest rate than federal loans, and if your income were ever to drop, you would have a harder time convincing the lender to lower the payments. (With federal loan interest rates so low, we'll get to them later.)
6. Put It to Other Goals
Everyone saves more when they have a goal in mind. So what is on your wish list? Home renovations? A dream vacation? Now is your chance, if you have refund money left, to add to your "big life goal" fund, and get a bit closer to making it a reality.
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7. Pay Down Federal Student Loans
Finally, if you really want to and you still have cash, send that check straight back to the federal government—but this time, to pay off your federal student loans. We've put this last, because federal student loans often have low interest rates and affordable payments. Plus, unless you have a high income (an adjusted gross income of more than $75,000 if you’re single and $150,000 if you're married filing jointly), you can deduct the interest.
Hey, if you couldn't get to everything on this list, that is quite all right. You can use this order for any windfall that comes your way, from a birthday check to a bonus. So save this for later. And HAPPY END OF TAX SEASON!